They have made it very clear that we are not employed in emails from SMART. We also don't work in a trade or business, thus I BELIEVE we fall into this category:

"If you are not an employee of the payer, and you are not in a self-employed trade or business, you should report the income on line 21 of Form 1040 (.pdf), U.S. Individual Income Tax Return, and any expenses on Schedule A (Form 1040) (.pdf), Itemized Deductions."

I haven't received the 1099-MISC but I assume the amount paid by SMART is reported in box 3 on the 1099-MISC. Can anyone confirm this?

Box 3 is where any income not reportable in any other box on the 1099-MISC is reported (from the 1099-MISC instructions):Box 3. Other IncomeEnter other income of $600 or more required to be reported on Form 1099-MISC that is not reportable in one of the other boxes on the form.Also enter in box 3 prizes and awards that are not forservices performed.").

Income reported in box 3 on the 1099-MISC is reported on line 21 of the 1040 (as indicated in the original post).

Just got the 1099-MISC yesterday. The payments are reported in box 3. The amount should be reported on line 21 on the 1040 (as indicated in the original post). Thanks to Guestagain for the initial research.

Guest wrote:Just got the 1099-MISC yesterday. The payments are reported in box 3. The amount should be reported on line 21 on the 1040 (as indicated in the original post). Thanks to Guestagain for the initial research.

Just because a company or org reports the money in box 3, doesn't mean it's exempt from self employment taxes.

After all, the IRS also states to companies and organizations that it's not correct to use a 1099-MISC to report scholarship/fellowship earning.

social security and medicare taxes are what are commonly called "payroll taxes" (which is calculated on a different basis than employment based income tax). Typically, if you work for a company, you pay a portion of the payroll taxes (individual or employee portion) and the company pays the other portion. When you work for yourself, you pay both the "individual" and "company" portions of the payroll tax. The "company" portion of the payroll tax that is paid by an individual who is working for himself is called the "self employment" tax.

The financial assistance received as a SMART scholar (stipend, book allowance, health insurance allowance, internship support payments) are considered when calculating your GAI (gross adjusted income) but is not considered income from employment (income derived from a "for profit" activity) and therefore there is no social security and medicare tax paid on the SMART payments.

There may be situations where a very crafty tax preparer will determine that you can actually reduce your total tax liability by treating the SMART payments as part some other "self employment" activities (perhaps enabling you to deduct your internship living expenses). But if you are using a qualified tax preparer to file your taxes you don't need my advice, except to make sure the preparer is actually well qualified (C.P.A. or tax attorney).

New to smart. first year dealing with taxes. I spoke with the IRS regaurding the 1099 misc box 3 and they said it needs to be entered on line 7 not 21. they stated that if i entered it on line 21 I run the risk of the IRS coming back to me. I will try calling them again tomorrow to see if I receive the same answer. looking into hiring someone to do the taxes this year. Also, in talking with the IRS and it is stated on there page that nothing for education should be on the 1099misc. it should be on the w2. i think smart is trying to use a loophole so they do not have to pay into social security.

social security and medicare taxes are what are commonly called "payroll taxes" (which is calculated on a different basis than employment based income tax). Typically, if you work for a company, you pay a portion of the payroll taxes (individual or employee portion) and the company pays the other portion. When you work for yourself, you pay both the "individual" and "company" portions of the payroll tax. The "company" portion of the payroll tax that is paid by an individual who is working for himself is called the "self employment" tax.

The financial assistance received as a SMART scholar (stipend, book allowance, health insurance allowance, internship support payments) are considered when calculating your GAI (gross adjusted income) but is not considered income from employment (income derived from a "for profit" activity) and therefore there is no social security and medicare tax paid on the SMART payments.

This info is completely correct. I've done my taxes this way for 4 years. Please everyone do not give the IRS extra money because of paranoia.

=== this is not official tax advice, just one man's opinion, you cannot sue me if this is wrong and you get screwed ===

For 3 years I put the income on Line 7 ("Wages, salaries, tips, etc."), indicated to the side as "SCH" for scholarship income. But, I counted it all as taxable scholarship income since I did not have "eligible educational expenses" that I paid, which could have been counted as non-taxable income. Since ASEE paid tuition/fees directly to the school, my stipend was just used for my living expenses, which are NOT tax-exempt. I suppose if I bought a textbook that was required for a class, I could have counted that amount as non-taxable. But, I was basically done with classes (PhD student) when I started with SMART, and I did not want to worry about keeping a receipt to prove I bought a required book for $100, thus reducing my tax burden by $0.05 (or whatever).

As others have said, the scholarship is NOT self-employment income, at least not the stipend given during the school year. Look at the IRS definition of scholarship income vs. self-employment income. You are receiving money for the sole purpose of supporting yourself while pursuing a college education. That's a scholarship, plain and simple. Why did ASEE decide to report the income on a 1099-MISC? I don't know. But do not assume that they did this after some grand assessment and thorough review of tax code and proper practice. I'd bet it was just the easiest way to do it, so they did it. By reading this forum, you should know to never assume that anything the SMART Program does has been done with careful, thoughtful, and rational analysis.

Now, the extra money from the internship support payments is a different story. I've heard of different interpretations of how to treat that money, and I'll avoid getting into those details...

Again, not an expert but- The scholarship related payments [generally] go directly to the school and are reported on the 1098 sent to you by the school. Stipends and other non-scholarship payments (stipends, internship assistance payments, etc.) are reported on the 1099-misc sent to the SMART scholar by SMART. The payments recorded on the 1099 are not "payment for services" and are therefore not subject to self-employment taxes. That is why they are reported in box 3 and not in box 7. (Box 7 on the 1099-misc is for non-employee compensation for services rendered.) The SMART non-scholarship payments are treated as "awards", not as compensation. They are therefore not subject to self employment taxes but are certainly subject to regular income taxes. That is why you report those payments on line 21 in the 1040. But, if you want to give extra $$$ to the IRS, report the payments on line 7 on the 1040 and pay the extra ~8%. I am sure your country will be grateful for the additional revenue.

Guest wrote:But, if you want to give extra $$$ to the IRS, report the payments on line 7 on the 1040 and pay the extra ~8%. I am sure your country will be grateful for the additional revenue.

Income reported on Line 7 is taxed at the same rate as that on Line 21 (it all adds into your "total income" line 22). The only difference is you define the money as "Other Income" and I define it as "Scholarship". I doubt the IRS really cares either way. It is easily justified either way. Reporting income on Line 7 (Wages) does not trigger any additional self-employment tax. That is only for income reported on line 12 (business income), but even then you still have to add the self-employment tax in on line 56.

TaxManCometh is correct. I think that there seems to be a bit of a conflict between the 1040 and the 1099-misc reporting instructions. The 1040 instructions indicate that taxable scholarship receipts (used for room, board, and other expenses in excess of the tuition and fees) should be reported on line 7 of the 1040. The 1099-misc reporting instructions indicate that receipts recorded in box 3 of the 1099-misc should be reported on line 21 of the 1040. I always thought that the first case (reporting taxable scholarship receipts on line 7 of the 1040) was for any taxable scholarship receipts reported on the 1098 received from the school, and the second case (reporting the SMART stipend, etc. on line 21 of the 1040) was for taxable "other income" reported on the 1099-misc box 3. However, as TaxManCometh indicated, the net difference in taxable income (and therefore the net difference in net income tax) resulting from choosing line 7 or line 21 of the 1040 is $0.00, so there will be almost 0% chance that the IRS will waste time coming after you because you reported the item on the "wrong" line. My (unprofessional) advice is to let your tax software or your tax preparer decide where to report the SMART receipts reported on the 1099-misc.

In any case, I don't see any way the SMART payments can be considered "self-employment income". We are not receiving these payments in a "for profit" activity. Therefore, (as many have said before) I don't think there is any self-employment tax liability associated with the SMART payments. So, even if you do complete a Schedule SE for profits from any true "for profit" activities in which you are involved, don't include the SMART payments recorded on the 1099-misc in the Schedule SE.

Just wanted to throw in my 2 cents here. I agree that calling this income self-employment is incorrect. However, I want to point out that it doesn't take much wizardry to make it so that this is beneficial. Anyone who has a family would benefit from calling this income self-employment because then the income is considered "earned income." This becomes quite important when you consider that some of the biggest tax credits only apply to those with earned income. All in all, in my case, although self-employment raised my taxes, it raised my refundable credits and deductions even more, so it would be to my advantage to claim it as self-employment.

Because of this, I consulted a tax professional (my instinct and reading of the tax laws said I shouldn't do it this way so I wanted to get a second opinion before leaving money on the table) and she confirmed my suspicion that both our stipend and internship payments should not be listed as self-employment.

She also confirmed what others have said that this should be listed as a "W-2 Scholarships not reported on a W-2," rather than the "1099-MISC Other income." Even though it all washes out exactly the same tax-wise, a nice aspect of filing this way is that when you need your previous tax forms for getting a loan or something, it then shows this money as a part of "wages" rather than "miscellaneous income" which is more questionable.

Lastly, I want to throw this question out there... since it seems to be debatable on how to file this income, has anyone found a legitimate way to claim this income under an "earned income" of some kind (besides self-employment)? This makes a difference of thousands of dollars for me and it really seems like it should still count for the "concept" of what those tax credits are supposed to be used for, so I've been holding out in the hopes of finding a way to do it.

Also, unless you are claiming self-employment, I don't think you can claim moving and travel expenses for the internship (which really hurts those of us that had to maintain two households during this time) nor the cost of insurance (which is unfair since it's required and is otherwise counted as taxable income). You can claim the moving expenses when you start phase 2, but if I'm reading the rules correctly, I don't see anywhere we can claim expenses for a temporary move.

Anyone out there claim these deductions without going the self-employment route?

I'm sorry to post 3 times in a row, but another thought occurred to me last night... Although we have been told that these payments are not for services rendered, I'm not so sure that that is a fair statement since if we don't fulfill our side of the contract we must repay all the money we received. So, it seems to me that this isn't the same as scholarship income because it is tied to future work. Other "scholarships" may have restrictions and expectations to continue receiving the money, but I don't think they ever need to be paid back if future obligations are not met. Shouldn't this be then treated the same as another profession that is simply paying in advance? In fact, I think this is precisely why they call us "Independent Contractors" and give us a 1099-MISC rather than a W-2 for scholarship payments.

IRS definition of Scholarship:A scholarship is generally an amount paid or allowed to a student at an educational institution for the purpose of study.

IRS definition of Stipend (this is from the ITG section, but I would think this definition applies to anyone)A stipend is defined as a fixed sum of money paid periodically for services or to defray expenses.

I believe the ASEE sees the money being paid to us as payment to defray our living expenses while we complete Phase I of the contract - especially since they restrict our ability to have other income. If they called it a scholarship, then they could not expect us to repay the money if we do not complete Phase II of the contract.

Any thoughts?

Side Rant:It's really ridiculous that they can't just make this clear. Clearly, if a government agency can't even tell you how to accurately claim money received from them our tax laws are too complicated and subject to manipulation. This shouldn't be a guessing game nor should it be difficult to decipher. None of wants to get in trouble for making a mistake on our taxes and the fact that they can't give us "tax advice" tells me that our tax code is way too easily manipulated. There should be a right way and a wrong way, not a "whatever way you can get the biggest refund / lowest tax liability without getting caught."

If the tax code wasn't so complicated and hard to understand then tax accountants and tax lawyers wouldn't be making so much money. The fact is that the code isn't even the final determining factor. The tax courts have the final say, and any case that goes to court will probably be there for years. So, until the IRS complains about the way you file, and you take it all the way to the courts, we will never know the "correct" way to file. But the IRS has had its resources so limited by budget cuts, there is very little probability we will ever know the "correct" way to file for any phase I payments. Just know that, as long as you have a reasonable explanation for the way you filed (i.e you did not commit fraud), if the IRS thinks you filed incorrectly and they think you owe additional taxes, there will probably be no "harsh" punishment (but you will have to pay the additional tax).

If to report all the annual incomes is the very thing, you got off easy then. To make this extra clear, I'm not a big tax person as well - nobody is - but this part of the process become less painful in last several years, when paper-free has taken place. There are all the forms available on the IRS official website, but I prefer to work them via this tool https://w9.pdffiller.com because it allows to fill the form without printing it out, and do some edits alongside if needed. Furthermore, there's no hidden potholes with reporting your incomes, IRS are not that bad guys

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